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Financial Markets
Financial Markets
• Cash
• An equity instrument of another entity
• A contractual right to receive cash or another
financial asset from another entity.
• A contractual right to exchange instruments with
another entity under conditions that are
potentially favorable.
• Ex. Notes Receivable, Loans Receivable,
Investment in Stocks, Investment in Bonds
A Financial Liability is any liability that is a
contractual obligation:
• To deliver cash or other financial
instrument to another entity.
• To exchange financial instruments with
another entity under conditions that are
potentially unfavorable.
• Examples: Notes Payable, Loans Payable,
Bonds Payable
• An Equity Instrument is any contract that
evidences a residual interest in the assets
of an entity after deducting all liabilities.
• Examples: Ordinary Share Capital,
Preference Share Capital
When companies are in need of funding,
they either sell debt securities (or
bonds) or issue equity instruments. The
proceeds from the sale of the debt
securities and issuance of bonds will be
used to finance the company’s plans. On
the other hand, investors buy debt
securities of equity instruments in hopes
of receiving returns through interest,
dividend income or appreciation in the
financial asset’s price.
Debt Instruments
• Debt Instruments generally have fixed returns
due to fixed interest rates.
• Treasury Bonds and Treasury Bills are issued by
the Philippine government. These bonds and bills
have usually low interest rates and have very low
risk of default since the government assures that
these will be paid.
• Corporate Bonds are issued by publicly listed
companies. These bonds usually have higher
interest rates than Treasury bonds. However,
these bonds are not risk free.
Equity Instruments
• Equity Instruments generally have varied
returns based on the performance of the
issuing company. Returns from equity
instruments come from either dividends or
stock price appreciation.
Types of Equity Instruments
• Preferred Stock has priority over a common
stock in terms of claims over the assets of a
company.
• Preferred stockholders have also priority over
common stockholders in cash dividend
declaration.
• Dividends to preferred stockholders are usually
in a fixed rate. No cash dividends will be given to
common stockholders unless all the dividends
due to preferred stockholders are paid first.
Types of Equity Instruments
• Holders of Common Stock on the other
hand are the real owners of the company. If
the company’s growth is spurring, the
common stockholders will benefit on the
growth.
• During a profitable period for which a
company may decide to declare higher
dividends, preferred stock will receive a
fixed dividend rate while common
stockholders receive all the excess.
Primary vs. Secondary Markets
• Primary Market - Financial market in
which securities are initially issued; the
only market in which the issuer is
directly involved in the transaction.
• Secondary market - Financial market in
which preowned securities (those that
are not new issues) are traded.
Primary vs. Secondary Markets
• To raise money, users of funds will go
to a primary market to issue new
securities (either debt or equity)
through a public offering or a private
placement.
Primary vs. Secondary Markets
• Public offering - The sale of either
bonds or stocks to the general public.